Take a 'Flyer' on this Canadian Stock

A growing demand for buses, combined with this stock's attractive dividend, make it the top choice of The Canada Report's Tom Slee.

Founded in 1930, Winnipeg-based New Flyer (Toronto: NFI) has grown from a small truck body works to the leading producer of heavy-duty buses in Canada and the United States.

With 2,200 employees and about 35% of the total North American market, the company generated $926 million of revenues last year and an operating profit of $80 million. Twenty of the 25 largest transit authorities operate New Flyer buses, and there is no reliance on any single customer.

With about 22,000 of the company’s vehicles in operation, New Flyer also benefits from an active aftermarket. Service and parts account for 28% of its operating profit.

We like it for the dividend, for starters. At the current rate of 4.875 cents per month (58.5 cents annually), the shares yield an attractive 5.63%.

But there's more to the story. New Flyer is well-positioned to benefit from the pent-up demand to replace aging municipal buses, especially as Daimler’s withdrawal in 2012 has opened up 10% of the market. Longer term, the fundamentals are extremely attractive. Buses are a growth industry as cities take steps to reduce the number of cars on their clogged arteries.

There is another big plus. On January 23, Brazilian giant Marcopolo, the world’s third-largest bus maker, established a 20% stake in the company. It’s a huge vote of confidence in New Flyer and injects $116 million of new money for growth and diversification.

The two companies have also signed an agreement to cooperate on engineering and other operational matters. This deal moves New Flyer to the next level.

The company’s quarterly results fluctuate depending on orders and deliveries. For the nine months ending September 30, revenues totaled $663 million and profit was $47 million, compared to $64 million in 2011.

This year’s numbers were impacted by a delay in an order of 90 buses from New York City Transit, but these units are not lost—just being moved to the 2013 production schedule. The current backlog is 6,206 units, and New Flyer expects to maintain a production line rate of 236 units a week in 2013. Earnings of about 40 cents a share in 2012 are expected to increase to the 70-cent range this year.

There are still constraints on US municipal spending, so the process of replacing aging bus fleets could take longer than expected. Any slowdown in economic growth would exacerbate the situation. Conversely, if the economy continues to improve, new orders could pick up at a faster rate.

After completing a restructuring in 2012, New Flyer's annualized dividend rate of 58.5 cents a share represents an 83% payout this year and about 60% in 2014. It appears to be safe.

Summing up, New Flyer offers an attractive yield and good growth prospects for investors who are prepared to accept above-average risk. New Flyer is a Buy.